Key Takeaways:
- The cost of doing business is set to increase for companies that don’t comply with anti-money laundering obligations, with potential penalties 40 times higher than existing rates.
- The changes are part of Bill C-12, which has passed in the House of Commons and is waiting for Senate approval.
- Firms that handle large transactions, such as banks and jewelers, will be affected by the changes.
- Experts are skeptical that higher fines will fix the gaps in the system, and may lead to overreporting of suspicious transactions.
- The increased penalties may lead to more court challenges and empowerment of compliance staff to convince companies to spend on oversight.
Introduction to Anti-Money Laundering Obligations
The cost of doing business is set to increase dramatically for companies that don’t keep a close eye on anti-money laundering obligations. A broad range of firms that handle large transactions, from jewelers to big banks, face potential penalties 40 times higher than existing rates. The changes are part of Bill C-12, which passed in the House of Commons on December 11 and is waiting for a final stamp of approval from the Senate. According to Vladimir Shatiryan, a partner at Blakes who focuses on financial regulations, "That legislation, if enacted, will significantly transform the enforcement framework." The changes would mean that companies that fail to report suspicious transactions could face significantly higher fines, with the potential penalty for TD Bank Group, for example, increasing from $9.2 million to $400 million.
Impact on Businesses and the Economy
The notable increase in potential penalties comes as part of wider efforts in Canada to step up anti-money laundering measures, including a significant ramp-up in penalties using existing rules. However, experts are skeptical that the higher fines themselves will do much to fix the gaps in the system. The size of the potential penalties means that firms will likely submit many more transactions for review, even ones they don’t necessarily think are suspicious, said Shatiryan. "Someone told me ‘Smile and file,’ rather than, you know, be more judicious and deliberate in identifying suspicious transactions when reporting," he said. This could lead to overreporting, which may not necessarily result in more effective enforcement, but rather create more noise in the system.
Expert Analysis and Concerns
Jeffrey Simser, a former legal director with Ontario’s Ministry of the Attorney General, shares the concern that the increased penalties may lead to overreporting. "There’s going to be more noise and less signal in the system as a direct consequence of what they’re doing," he said. However, Simser also notes that the measures may help empower compliance staff to convince companies to spend on oversight. "The good part of the fines is you can then say to your boss, yeah, I know it costs money, but guess what? If we don’t do this, we’re going to get a fine." Fintrac, the financial intelligence agency responsible for enforcing anti-money laundering laws, has stated that it has the modern systems and processes needed to fulfill its mandate, even with higher submissions.
Increased Enforcement and Court Challenges
The significant increase in potential penalties will also likely lead to many more court challenges, said Shatiryan, as the fines would justify the costs of litigation. Fintrac has seen numerous court challenges in the past, including one that led to a 2016 Supreme Court ruling that forced the agency to halt penalties for years as it reviewed its policies and made more transparent how it calculates penalties. More challenges are also likely as Fintrac ramps up enforcement more generally. Fintrac’s chief executive, Sarah Paquet, has stated that the agency is actively stepping up its enforcement action and will confront businesses that are not meeting their moral and social responsibilities.
Recent Developments and Escalation
The change in Fintrac’s approach can be seen in the record number of fines issued in recent years. The 2020-21 financial year saw $538,000 in penalties across nine charges, then $3.5 million and $1.1 million in the next two years. The 2023-24 year jumped to more than $26 million in fines on 12 violations, and last year had 23 notices of violation (the most ever) as well as more than $25 million in fines. This year has seen a further dramatic escalation, including a $177 million fine against Xeltox Enterprises Ltd., operating as Cryptomus, and a $20 million fine against Peken Global Ltd., operating as KuCoin. Cryptmous has appealed its record fine.
Capacity and Resources
While Fintrac’s step-up in fines has made companies take the rules more seriously, experts note that law enforcement agencies don’t have the capacity to deal with more submissions. Jessica Davis, president and principal consultant at Insight Threat Intelligence, said that even if Fintrac submitted 10 times more suspicious transactions, she doubts it would result in more enforcement action. "We just don’t really have much in the way of a financial crimes enforcement capacity in Canada," she said. The federal government has promised to move ahead with a financial crimes agency, but experts are waiting to see what actually happens. Simser notes that even if the initiative gets going soon, it takes years to properly train investigators to sift through complex financial filings, and none of it is cheap. "The biggest challenge, I think, is implementing and building the infrastructure to actually enforce the law," said Simser. "It’s going to take some time and it’s going to be hard work and it’s going to call for resources, and there’s never enough resources."
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